We also examine an often-overlooked tax affecting SMSF’s which will have a greater tax impact than the proposed Div 296. This is the tax payable by the ultimate beneficiaries of a death benefit payment out of a fund.
With the labor party decisively winning the Federal Election, the SMSF industry looks on with some angst given that the government reaffirmed their commitment to the Div 296 tax on unrealised gains for members with super balances above $3 million.
Even though a greater number of prominent Australians are voicing their concerns with this unprecedented tax on superannuation, Labor seems committed to reintroducing this unprecedented measure.
In the previous parliament, the proposed legislation was defeated in the Senate, however this time around Labor looks like extending their numbers in the upper house and only require the support of the Greens to pass legislation. The Greens have themselves outlined their desired position. They want the super member balance threshold dramatically reduced to $2 million. This is their price to support the proposed legislation.
The question is, will Labor agree to reducing the threshold to ensure that this legislation is passed or will the Greens agree to the original proposed threshold in order to secure other areas of their progressive agenda?
Further to this will an emboldened Labor government look at some point into the future to extend the taxing of unrealised gains in SMSF’s to other tax structures such as family trusts and companies? Only time will tell.
One thing Div 296 tax did highlight is that there is potentially a greater elephant in the room, one that has been around since the Howard government introduced the Simpler Super measures that imposed a death tax by stealth way back on 1 July 2007. That is superannuation death benefits tax. Many Australians will not pay Div 296 tax, (although without indexation this tax paying cohort will grow rapidly). However, almost every adult recipient of a superannuation death benefit from their parents that has a taxable component will pay death benefits tax.
The quantum of this tax will almost always dwarf the tax take from Div 296.
In order to highlight this point, we will outline this in the following example.
Gary is a member of an SMSF. He has a $1.2 million balance comprising $800,000 taxable component and $400,000 tax free component. He will most likely never pay Div 296 tax. However, if Gary dies and leaves his super to his two adult children, Wendy and Dwayne, $136,000 in lump sum tax will be withheld from the superannuation benefit to be paid, with only $1,064,000 paid to his next of kin.
In some ways, Div 296 tax has proved to be a wake-up call for many professional accountants, advisers, and their superannuant clients. Considering the negative possible outcomes from this poorly designed and thought through tax, the following strategies can be undertaken to limit its impact:
• Undertake a re-contribution strategy to withdraw a member’s balance that may have a predominately taxable component and then re-contribute the money back to super as a non-concessional contribution
• The re-contribution could potentially be contributed on behalf of a spouse with a lower account balance, which would result that over time both members ultimately have similar amounts in superannuation
• Withdraw amounts above the Div 296 tax from the super system altogether to avoid both this and any potential lump sum death tax
• Gift superannuation benefits pre-death to a member’s children or grandchildren, ensuring that the full benefit will end up in the hands of family members and not the government via tax on super
• Withdraw money from super and consider investing in other tax and investment vehicles, or alternatively invest money in individual names, to maximise the personal tax-free thresholds.
Clearly this proposed tax seems unfair particularly given that it only applies to the SMSF sector and not industry funds. As we have illustrated above there exist many ways to avoid this tax with careful planning.
It is incumbent on Australians who are affected by this tax to be proactive and seek advice from SMSF professional advisers and accountants who can assist them to navigate through this complex area. It is also a great opportunity to review and update one’s estate planning strategy to ensure that ultimately their beneficiaries and family members benefit rather than the government and the ATO.
Further Information
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